21. Ch7. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Chilly Moose Fruit Producer and make comments on its second-year performance as compared to its first-year performance. The following shows Chilly Moose Fruit's income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916.40 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Chilly Moose Fruit Producer Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 5,715 4,500 1,855 1,723 286 180 Operating costs except depreciation and amortization Depreciation and amortization Total Operating costs Operating Income (or EBIT) 1,903 2,141 3,574 2,597 Less: Interest 357 273 3,217 2,324 Earnings before taxes (EBT) Less: Taxes (40%) 1,287 930 Net Income 1,930 1,394 Calculate the profitability ratios of Chilly Moose Fruit Producer in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating profit margin 57.71% Net profit margin 33.77% Return on total assets 13.18% Return on common equity 24.78% Basic earning power 21.13% Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply. O A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. An increase in the return on assets ratio implies an increase in the assets a firm owns. If a company issues new common shares but its net income does not increase, return on common equity will increase